Title I

2013 has proven to be a strong year for IPOs. According to a recent PWC study, total IPO volume for 2013, as of December 17, reached 237 public company debuts, which is an increase over 2012. The overwhelming majority of these IPOs were completed by issuers that qualified as emerging growth companies. (The full details of the study are available here: http://www.pwc.com/us/en/press-releases/2013/pwc-q4-2013-ipo-watch-press-release.jhtml.) Issuers and their counsel have become progressively more comfortable with the IPO on-ramp practices. Issuers continue to rely on the confidential submission process for at least one or two amendments. EGCs are regularly relying on the executive compensation disclosure accommodations.

During 2013, the SEC also made substantial progress with JOBS Act implementation. Here is a brief recap:

Title I: The SEC recently published the report required by Section 108 regarding the disclosure requirements of Regulation S-K. Given the dialogue on disclosure reform generally, it seems safe to say that we should expect continued focus on this in 2014.

Title II: Title II provided additional legal certainty (beyond that which had been provided by pre-JOBS Act no-action letters) for matchmaking sites. Even before the Rule 506 amendments were finalized, it became clear that matchmaking sites that use the internet to reach (at that point) accredited investors would play an important role in the private financing market. During 2013, the SEC Staff provided additional guidance on these models both through the issuance of FAQs and through the issuance of no-action letters to AngelList and Funders Club. On September 23, 2013, the amendments relaxing the prohibition against general solicitation in certain Rule 506 offerings and in Rule 144A offerings became effective, as did the bad actor rules (required by the Dodd-Frank Act, not the JOBS Act). The SEC Staff also released guidance on various questions related to Rule 506 offerings and on bad actor issues. However, many questions have arisen regarding the necessary steps for investor verification in Rule 506(c) offerings, and additional guidance on these would be welcome. Relaxing the prohibition against general solicitation raises fundamental questions regarding the demarcation between “private” offerings and “public” offerings, and the integration of offerings occurring in close proximity to one another. SEC representatives have acknowledged that these integration issues will need to be tackled in the future. The SEC also proposed amendments to Regulation D, Form D and Rule 156. These have proven quite controversial, and it is difficult to predict whether certain of these amendments will be adopted.

Title III: The SEC released proposed rules establishing a framework for crowdfunded offerings.

Title IV: Most recently, the SEC released for comment proposed rules that provide a framework for Regulation A+ offerings. The SEC’s proposed rules would implement the JOBS Act mandate by amending and modernizing existing Regulation A; creating two tiers of offerings, Tier 1 for offerings of up to $5 million ($1.5 million for selling stockholders) and Tier 2 for offerings of up to $50 million ($15 million for selling stockholders); setting issuer eligibility, disclosure and reporting requirements; and imposing additional disclosure and ongoing reporting requirements, as well as an investment limit, for Tier 2 offerings, and, given these investor protection measures, making Tier 2 offerings exempt from blue sky requirements. Regulation A+ offerings may prove to be an important financing alternative for non-reporting companies seeking capital and broader market exposure.

All told, it has been a year of significant changes. Over time, we believe these changes are likelier to have more lasting impact on exempt financings than on the IPO market.

Since adoption of the Jumpstart Our Business Startups (JOBS) Act, emerging companies have a broader array of financing alternatives, including the opportunity to rely on the accommodations available to emerging growth companies under the Title I “IPO on-ramp” provisions. Our recently updated IPO Field Guide provides an overview of the path to an initial public offering. You may access a copy here.

In two programs focusing on the JOBS Act, Anna Pinedo and David Lynn of Morrison & Foerster share their expertise to help course attendees gain a greater understanding of the JOBS Act and its implications for different types of companies.

JOBS Act Program 1 – Title I

Topics include:

IPO on-ramp

IPO process for an emerging growth company (“EGC”)

Application of Title I concepts to other transactions, including exchange offers, tenders, acquisitions and spin-offs

Research for an EGC

Other capital formation discussions

Preview a 2-minute video of JOBS Act Program 1. The program is available in its entirety here.

JOBS Act Program 2 – Private Placements & Other Exempt Offerings

Topics include:

Title II and the elimination of the ban on general solicitation

Crowdfunding

Regulation A+

Titles V and VI

Other discussions relating to the JOBS Act

Preview a 2-minute video of JOBS Act Program 2. The program is available in its entirety here.

In a recent speech (see http://www.sec.gov/news/speech/2013/spch041913laa.htm), SEC Commissioner Aguilar addressed the “scale back” of disclosures in connection with the JOBS Act, and the role of institutional investors in the capital markets. Commissioner Aguilar cited a paper noting that institutional investors were better at avoiding the worst-performing investors—presumably based on their analysis of financial information made available by public companies. He noted that the JOBS Act reduces the amount of information required to be made public by emerging growth companies. This raises a number of interesting questions. The accommodations available to EGCs under Title I of the JOBS Act relate principally to scaled back executive compensation disclosures. Would more fulsome executive compensation disclosures be helpful or informative to investment decisions? It is unlikely that more robust compensation disclosures would be essential to an investment analysis. Title I also permits EGCs to present two years of financial information in their filings. Perhaps it could be argued that two rather than three years of data would make a difference to an initial investment analysis; however, there is no data yet that would substantiate whether there is a measurable difference to institutional investor decisions based on the availability of a third year of data. Before concluding that the relatively modest scaled disclosures available to EGCs pose an issue, should we consider whether institutional investors simply have resources to conduct their own analysis, and have access to information (often from investment banks) that is not available to retail investors?

On April 11, 2013, Lona Nallengara, Acting Director of the SEC’s Division of Corporation Finance, and John Ramsay, Acting Director of the Division of Trading & Markets offered testimony before the House Subcommittee on Investigations, Oversight and Regulations of the Committee on Small Business. Their testimony, which provides an overview of the Act and the implementation efforts to date is available here: http://www.sec.gov/news/testimony/2013/ts041113lnjr.htm.

Commenting on Title I, Nallengara and Ramsay noted that SEC staff is consulting with the exchanges on the structure of a pilot program on modified tick sizes. They also noted that the Staff is preparing its recommendations in connection with the mandated review of the disclosure requirements in Regulation S-K, and expects to complete the review in “the near future.” On Title II (the Rule 506 rulemaking), they noted that the Staff is developing recommendations for the Commission’s consideration. There was no sense given regarding the timing of proposals relating to Title III (crowdfunding) or Title IV (Regulation A+).

Any milestone, such as an anniversary, provides an opportunity for reflection and evaluation. At the one-year anniversary of the JOBS Act, preliminary experience gives reason for some optimism. The centerpiece of the JOBS Act, the “IPO on-ramp” provisions contained in Title I, have proven quite useful. The SEC Staff’s guidance in the form of Frequently Asked Questions (or FAQs) promptly filled the gaps in the legislation and helped facilitate prompt reliance on these new provisions. It would be too soon to draw conclusions regarding the impact of the on ramp on IPOs in general, and smaller IPOs in particular. The provisions relating to the Exchange Act threshold, which also were immediately effective, have already been relied upon by many smaller banks to suspend their ongoing reporting. Most of the other provisions of the JOBS Act await further SEC rulemaking. Below we provide a very brief “cheat sheet” of the status of the various provisions. We believe that it is fair to say though that the JOBS Act has already had a profound effect on capital formation by restarting an important dialogue on SEC disclosure requirements and permissible communications that seemed to come to an end just after the Securities Offering Reform in 2005, when attention turned to executive compensation disclosures, corporate governance concerns, and ultimately the financial crisis. The JOBS Act also has served to bring greater general awareness of the important changes that have taken place in the last decade in the way that promising companies choose to finance their growth. Finally, even for the non-securities lawyers among us, the JOBS Act has focused attention on the divide between public and private offerings—challenging all of us to think more closely about the appropriateness of certain existing regulations that seem more and more “artificial” in the face of social media and other developments.

Title I (the IPO on-ramp)

This Title was immediately effective, so no SEC rules were required for this title to take effect.

Market participants have been cautious in relying on some of the accommodations available to EGCs; however, over time, market practice may shift.

Most EGCs are still presenting three years of financial information (instead of the permissible two years).

Most EGCs are taking advantage of the ability to present abbreviated executive compensation disclosures.

Most EGCs are taking advantage of the ability to submit their IPO registration statements for confidential review by the SEC, and relying on the confidential process for at least one or two rounds of SEC comments, before the first public filing.

EGCs also are benefiting from the delayed phase-in of other costly compliance requirements, like the Sarbanes 404 attestation requirement.

Now, at the one-year anniversary, a fair number (just over 100) of EGC IPOs have been completed.

Statistics indicate an increase in smaller IPOs, which, in part, was one of the desired outcomes of the JOBS Act.

In addition to providing a new approach for EGC IPOs, Title I also addresses analyst research issues, and requires that the SEC undertake several studies.

Research

Even after the JOBS Act, the unlevel playing field remains as to research, as a result of the Attorney General Settlement, the terms of which have not been modified.

FINRA modified its rules in accordance with the JOBS Act.

Most investment banks now have settled (informally) on a 25-day post IPO quiet period before publishing research following completion of an IPO.

There is no evidence that investment banks are interested in releasing pre-deal research reports for EGCs.

Additional regulatory changes would be needed in order to promote additional research coverage for EGCs.

Studies

The SEC published the required decimalization study and held a decimalization roundtable; a consensus has formed that a pilot program should be initiated for larger tick sizes.

The required study on Regulation S-K has not been delivered.

Title II (Private placements)

The SEC proposed rules in August 2012 to carry out the JOBS Act mandate to relax the ban on general solicitation

The comment period closed in October 2012; however, the rules have not been finalized.

There was vigorous comment on the SEC’s proposed rules, with some commenters advocating the adoption of a safe harbor relating to the measures that would be deemed “reasonable” to verify the status of investors; the adoption of content restrictions or guidelines for materials used in general solicitation; and a reexamination of the “accredited investor” threshold.

We anticipate that the SEC will seek to finalize the rules in the spring, and seek to finalize the “bad actor” provisions (required to be adopted for Rule 506 offerings by the Dodd-Frank Act) contemporaneously

Matchmaking sites

There were no rules needed in respect of the broker-dealer registration exemption for matchmaking sites

The SEC Staff put out guidance in the form of FAQs addressing various matters relating to the types of entities that might engage in these activities without subjecting themselves to broker-dealer registration.

The SEC Staff issued two no-action letters addressing the applicability of the exemption in the context of VC platforms.

Title III (crowdfunding)

No SEC rule proposal as yet (SEC missed deadline)

The SEC Staff published FAQs regarding the crowdfunding exemption.

FINRA has provided a form for collecting information about funding portals.

Concerns remain about the extent to which the crowdfunding exemption as contemplated by the JOBS Act could be used by ventures to raise small amounts of capital in a cost-efficient manner.

Title IV (Regulation A+ or Section 3(b)(2))

No SEC rule proposal as yet.

Now, pending legislation would mandate that the SEC take action by a date certain.

Titles V & VI (Exchange Act threshold)

These provisions relating to the Exchange Act threshold were immediately effective; SEC rulemaking was not required.

Many banks (over 100, according to published reports) have taken advantage of these provisions to suspend their SEC filings.

The SEC is expected to provide guidance regarding various “holder of record” issues.

What should you expect in the coming months? We anticipate that the SEC will move ahead with finalizing the rules required under Title II to address general solicitation in certain Rule 506 and Rule 144A offerings. We expect that this will be accompanied by the final “bad actor” rules required under the Dodd-Frank Act. The discussion about general solicitation is likely to cause the SEC to revisit the “accredited investor” definition—perhaps resurrecting parts of the SEC’s 2007 “larger accredited investor” standard. Given the complexities to be addressed by the SEC and FINRA in connection with creating a framework for crowdfunded offerings and funding portals, we anticipate that a proposal relating to crowdfunding may not be released until the second half of 2013. As we have already seen from meetings of various advisory committees, more attention likely will continue to be focused on rationalizing the disclosure requirements and the communications rules applicable to smaller public companies and companies that might have qualified for EGC status (but for the date of their initial offering of equity securities). Given the higher registration thresholds under the Exchange Act, we may continue to see the development of a trend toward staying private longer, and the growth of markets designed to provide liquidity to investors in those companies. Given the press of other business under both the JOBS Act and the Dodd-Frank Act, we may not see a proposal for exempt public offerings under Title IV in 2013. Lastly, we would hope that the momentum toward encouraging capital formation that was created by the JOBS Act will not be lost in its second year of existence, and we will instead see continued dialogue—coupled with regulatory and market action—that is oriented toward creating opportunities to put capital to work companies of all sizes.

Title I of the JOBS Act mandated that a study be conducted on the impact of decimalization. This study was delivered earlier in the year, and the SEC announced that it would call for a roundtable to discuss the impact of decimalization and consider alternatives. The roundtable will be held at the SEC on February 5, and will consist of three panels. The first panel will consider the impact of tick sizes on small and mid-sized companies, the economic consequences of increasing or decreasing minimum tick sizes, and whether other policy alternatives might better address concerns raised by the JOBS Act. The second panel will address the impact of tick sizes on the securities market generally. The third panel will address potential methods for analysis of the issues, including a pilot study. Electronic or paper submissions may be submitted to the SEC.

On November 14, 2012, TheWall Street Journal published a story highlighting how a number of companies going public have not availed themselves of the looser requirements contemplated by the “IPO on-ramp” provisions in Title I of the JOBS Act. Title I established a new process and reduced disclosure requirements for IPOs (and subsequent reporting) by “emerging growth companies,” which are defined as issuers with total annual gross revenues of less than $1 billion during its most recently completed fiscal year.

The article highlights how a stigma may be attached to EGC status, with companies going public trying to avoid the classification as a “little-boy” company which might come with utilizing the Title I disclosure and reporting breaks. For example, a review of 55 EGC prospectuses by The Wall Street Journal revealed that 85 percent of the EGCs that went public since April 2012 have said that they would not delay the adoption of any new or revised accounting standards under Section 107(b) of the JOBS Act.

Practical Law Company recently published its “Survey of JOBS Act Disclosure and Elections in Recent IPO Prospectuses,” and it revealed a slightly more nuanced view of Title I’s implementation. The survey noted that a total of 28 companies identified themselves as EGCs in 36 IPOs conducted by US issuers between enactment of the JOBS Act and August 31, 2012. The survey revealed that all of these EGCs included a full three years of financial statements, with only approximately one-fifth including less than five years of Selected Financial Data. Surprisingly, only one quarter of the EGCs availed themselves of the reduced executive compensation disclosure requirements contemplated in Title I. The Survey also confirmed the same accounting standards outcome identified by the Wall Street Journal, in that the vast majority of the EGCs have chosen to opt out of the extended transition period for delayed implementation of new or revised accounting standards.

These initial results suggest that marketing considerations may play the most significant role for an EGC deciding whether to utilize the benefits of Title I, and that at least at this point there is little appetite for straying too far from market norms, even if some cost savings can be achieved. Changes to the IPO market and more familiarity with the on-ramp provisions may ultimately result in an evolving view of EGC status, but for now EGCs must tread carefully in deciding whether the on-ramp provisions are right for them.

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